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Amateur Investors Weekend Market Analysis (11/28/09)

http://www.amateur-investor.net/Weekend_Market_Analysis_Nov_28_09.htm

Next week the market will enter the month of December which historically has been the best performing month for the Dow since 1896 as shown in the table below with the Dow having a 70% chance of having a positive return.

Dow Monthly Returns since 1896

     Positive Negative   %        % 	Average 
      Returns  Returns Positive Negative Return 
 Jan 	73 	40 	64.6 	35.4 	0.97 
 Feb 	57 	56 	50.4 	49.6   -0.29 
 Mar 	68 	45 	60.2 	39.8 	0.77 
 April 	63 	50 	63.0 	37.0 	1.22 
 May 	58 	55 	51.3 	48.7 	0.02 
 June 	56 	58 	49.2 	50.8 	0.25 
 July 	70 	44 	61.4 	38.6 	0.41 
 Aug 	74 	39 	65.5 	23.5 	1.27 
 Sep 	47 	66 	41.6 	58.4   -1.15 
 Oct 	65 	58 	57.5 	42.5 	0.19 
 Nov 	68 	45 	60.2 	39.8 	0.90 
 Dec 	79 	33 	70.5 	29.5 	1.38

Meanwhile the past two years 2008 and 2007 the Dow didn't have a positive return for the month of December. Going back to 1896 the Dow has never had "3" consecutive years in a row in which it has had a negative return for the month of December. In fact the Dow has only seen "5" other periods in which it had back to back years with a negative return in December. These were in 1930-1931 (point A), 1936-1937 (point B), 1968-1969 (point C), 1974-1975 (point D) and 1980- and 1981 (point E). All of these events were then followed by a positive monthly return for December of the next year ranging from 0.7% to 6.2%. Thus if history repeats itself then the market should have a positive return for December.



As we have seen since late 2007 the S&P 500 completed a 5 Wave pattern to the downside which ended in March of this year. Since then we have seen an ABC corrective rally as Wave A completed in June with a 43% gain while Wave B was a rather short lived 4 week pullback of only 9%. Meanwhile this has been followed by by Wave C which so far has gained 28%.

If the S&P 500 were to have a positive month in December the target range to look for would be in the 1121 to 1158 area. 1121 is the longer term 50% Retrace calculated from the October 2007 high to the March 2009 low. Meanwhile 1158 is calculated by taking the length of Wave A which was 289 points and adding that number to the bottom of Wave B which was at 869 (289 + 869 = 1158).


Although the market may have a positive bias for December there are some signs that the major averages are getting close to a potential top. We are beginning to see a divergence developing in the Financial Sector, as denoted by the Banking Index (BKX), which hasn't been making new 52 week highs of late while the S&P 500 has. Back in 2007 there was a similar divergence as the BKX topped out several weeks before the S&P 500 did as shown in the chart below.



Meanwhile another sector that is showing a divergence are the Semiconductors as denoted by the Semiconductor Index (SOX). Although the Nasdaq has been making new 52 weeks highs of late the SOX hasn't. Keep in mind we saw a similar divergence back in 2007 as well as the SOX peaked before the Nasdaq did. In addition also notice the SOX bottomed in November well before the Nasdaq did in March. Thus when you begin to see divergences developing between key sectors and the major averages this is something to keep an eye on.



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